CHAPTER 9

Sources of Capital
SECTION 1: Saving SECTION 2: Investing SECTION 3: Stocks, Bonds, and Futures SECTION 4: Borrowing and Credit

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SECTION 1

Saving

Objectives:
 What benefits do people gain by saving money?  How do savings accounts differ from time deposits?  How do economists measure savings?

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SECTION 1

Saving

Benefits of saving money:
 security  interest

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SECTION 1

Saving

Difference between savings accounts and time deposits:
 Savings accounts
 offer liquidity  have variable interest rates

 Time deposits
 require the saver to leave money in the account

for a specific amount of time  offer higher and fixed interest rates  offer reduced liquidity
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SECTION 1

Saving

Economists measure savings by calculating the savings rate, or the percentage of people’s unspent disposable income.

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SECTION 2

Investing

Objectives:
 What are the goals and elements of a personal financial plan?  How do financial investment and real investment differ?  How does real investment affect economic growth?
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SECTION 2

Investing

Goals and elements of a personal financial plan:
 spending and saving plan—to create a personal budget  investment plan—to put money to work  retirement plan—to save and invest money for retirement  estate plan—to allow the transfer of a person’s property after death
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SECTION 2

Investing

Difference between financial investment and real investment:
 financial investment—exchanging property ownership and payments to make a profit  real investment—using money to create new capital goods

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SECTION 2

Investing

Real investment affects economic growth by increasing the number of capital goods used by producers.

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SECTION 3

Stocks, Bonds, and Futures

Objectives:
 Why and how do people invest in stocks?  What factors influence stock prices?  How do corporate and government bonds differ from stocks?  What are the advantages and disadvantages of futures?
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SECTION 3

Stocks, Bonds, and Futures

Why and how people invest in stocks:
 to gain profit  to limit the risk on their investments  to become a part owner of a corporation

How to invest in stock:
 buy from a broker  buy from an investment bank
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SECTION 3

Stocks, Bonds, and Futures

Factors that influence stock prices:
 corporate finances  investor expectations  external forces, such as changes in the economy or international events

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SECTION 3

Stocks, Bonds, and Futures

Corporate and government bonds
 offer lower interest than stock dividends  offer less risk than stock

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SECTION 3

Stocks, Bonds, and Futures

Advantages of futures:
 high profit potential  guarantee that original purchase price of the futures will be honored

Disadvantages of futures:
 high risk  requires specialized knowledge about commodities being bought or sold
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SECTION 4

Borrowing and Credit

Objectives:
 How do lenders make money on loans?  What factors influence a credit rating?  How can credit help the economy?

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SECTION 4

Borrowing and Credit

Ways lenders make money on loans:
 interest  repossession

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SECTION 4

Borrowing and Credit

Factors that influence a credit rating:
 ability to pay  number of assets owned  credit history

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SECTION 4

Borrowing and Credit

Benefits of credit to the economy:
 stimulates growth  promotes stability

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CHAPTER 9

Wrap-Up
1. Identify which of the following savings plans would provide the greatest possible liquidity: regular savings accounts, certificates of deposit, savings bonds. Explain your answer. 2. Why do economists study savings rates? Name one important determinant of savings rates in the United States. 3. Explain the difference between financial investment and real investment. Provide an example of each type of investment.
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CHAPTER 9

Wrap-Up
4. Describe the different ways that you can earn profits from stock purchases. Compare a capital gain and a capital loss. 5. How does a broker’s job differ from that of a market analyst? 6. What are the benefits and liabilities of credit? Describe three pieces of legislation that protect consumers from unfair credit practices.

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